Private equity LPs gaining power, experts say

In the often cloistered world of private equity, a subtle but major shift is occurring in the balance of power between general and limited partners.

While general partners have held the most sway in setting up and structuring funds, limited partners are becoming more empowered and selective about choosing managers, experts say.

With new funds cropping up and a difficult economic environment to deal with, securing good benchmarking and performance data is crucial for limited partners, according to experts. They in turn are pressuring general partners to improve terms and focus on their strategies, according to a panel of private equity experts who discussed the challenges facing limited partners on Tuesday. The panelists included Suresh Krishnamurthy, senior managing director of global services at State Street Corp.; Stephane C. Chevrier, managing partner of Equifin Alternative Investments LLC, a private equity fund in New York; Kareem Hamady, private equity product manager at Bloomberg; and Olivier Dellenbach, founder and CEO of eFront. Jeremy Hocter, product manager Pevara, moderated.

The occasion for the roundtable discussion was the launch by Paris-based software vendor eFront of a benchmarking tool for limited partners of private equity funds. The new Web-based service, known as Pevara, gives limited partners access to analytics, allowing advanced performance monitoring and benchmark analysis of peer data. According to eFront, it allows the LP community to conduct independent analysis of investment returns, monitor industry performance trends and conduct like-for-like comparisons of investments for consistent, accurate risk reporting and asset allocation monitoring.

The presentation concentrated on benchmark quality and availability of information, best practices for benchmarking private equity performance, as well as due diligence, and evaluating potential fund investments and new managers.

With the right benchmarking tools everyone in private equity benefits, general partners as well as limited partners, Krishnamurthy said.

There is too much reliance by LPs on public benchmarks, such as the S&P 500 Index, which “can fall short” in some respects, he said. Good benchmarks, he said, should be able to provide global reach, as well as provide performance and benchmark capability for an increasing and diverse number of investments.

Hamady agreed, saying there is a need for standardization and transparency across the private equity landscape. “Both GPs and LPs,” he said, “are looking for customizable solutions with robust sets of data points. There are multiple options, but no singe option out there meeting [everyone's] needs.”

Chevrier, speaking as an investor in the market, said the eFront tool and others were important for analyzing data, but that other factors are crucial as well. “A data point is only a record. It’s not the only decision criteria,” said Chevrier, who has done over $400 million deals in the private equity secondary market.

One of the biggest challenges is finding the right investments with the right strategies, the experts said. It can be more complicated in non-US. private equity funds because the data is less complete and providers tend to have a bias toward their own geographic base, Dellenbach said.

One advantage of investing in a portfolio of private equity funds, as opposed to one or two funds, he said, is it reduces volatility and thereby lowers risk.